As the softwood trade heads out of the second quarter and into July, the prevailing market conditions remain unchanged since January, with demand chasing supply. On top of production constraints caused by fibre shortages and the fallout from the coronavirus pandemic, there are now extra hold ups on the supply side due to shortages of freight space, which are thwarting some sawmills’ best efforts to catch up with contract balances.
UK importers have been trying to call in, and push for, as much volume as possible before the summer holidays start. They are particularly focused on Scandinavia, where shutdowns usually close production for two weeks and annual maintenance or upgrades are carried out. The push to increase imports has resulted in a number of bottlenecks in the logistics chain both at home and abroad.
To try to relieve the pressure at some UK ports where landed volumes are backing up due to a shortage of road haulage, some shipping lines have been spacing out vessels. With restricted sea freight availability, some export berths have been informing sawmills to hold back deliveries as space is short. At the point of export, some of the main quayside space is congested in Riga where the stevedoring companies have told mills to wait until the situation clears, or switch to less busy quaysides with liner services to alternative UK ports.
It is not only the distribution of timber products that is affected in the UK. The heads of several major industries, including food distributors and supermarkets, are saying that there is a nationwide shortage of HGV drivers estimated to be 100,000. The Road Haulage Association (RHA) points to increased legislation, bureaucracy, taxation, and the lack of new trainees due to Covid restrictions as being only a few of the many factors threatening logistics. They (RHA) say that the situation is critical and needs to be addressed by the UK government urgently.
Softwood producers have been working at full capacity during Q2, but supply is still lagging behind demand. The situation is reflected across all types of products, from packaging grades through to construction grades and high-end joinery quality. As a result, prices have been soaring across the globe, but as July came into view, shippers were keeping a close eye on the US market where prices appear to have peaked and are softening, albeit from ultra-high levels.
Reports from the US are based on lumber futures and certain indexes, but the actual trade in softwood is staying strong and European producers are confident that real market levels will be maintained. On top of the record increase in north American lumber prices, there is talk the US could double the duty on Canadian imports from the current 9% to 18%. This move threatens to push up prices even higher and would make European whitewood supplies even more attractive to satisfy US demand.
In Sweden, sawmill output has been running at maximum permissible levels backed up by a consistent log supply, which has been at advantageous cost prices compared to other countries. In the Baltic states, log supplies have been in a far more precarious position and raw fibre imports into Latvia from across the borders are at their highest levels.
The reason for this is that Latvian forestry supply is split evenly between private growers and the state-owned resource. When harvesting sawlogs, a certain volume is only suited to pulp and paper.
An overall fall in demand for pulp fibre has meant that the regular buyers situated in the Nordic region have stopped ordering and are restricting their intake to home-produced product instead. This has proved a disincentive for the private sector to fell their forest stands and with 50% of the logs normally being provided by private growers, this position leaves Latvian mills short of volume.
In 2020, newsprint declined by more than 20% and writing paper by almost 18.5% and it is the industry’s prediction that these products will continue in decline. There is a possibility that paper and card-based packaging could grow substantially as time goes by where it is able to replace plastics. Perhaps a move from the packaging industry will compensate for the drop in paper and help to re-balance the demand for lower grade softwood fibre.
To make up the raw material shortfall, many Latvian softwood producers are chasing material from anywhere they can acquire it. The problem is that virtually all sources of supply have been picked over many times and the quest for logs or ungraded sawn fibre has extended further into Russia than Baltic processors would normally reach. Sourcing has spread into the Ukraine where log prices are now set to hit record highs in the July auctions.
From July 1, Russia has announced the application of an export duty for timber where the moisture content exceeds 22%, and from January 2022 there will be an export ban introduced on sawlogs. The primary driver is intended to support Russian mills and increase revenue on unprocessed fibre, but the move will limit future supplies to Baltic producers.
For many years, Baltic sawmills and processors have also relied on supplies from neighbouring Belarus, but with the current political situation cross-border exports have been restricted.
Belarus produces approximately 5.2 million m3 of sawn softwood, and until recently was exporting over 4 million m3 to all markets, of which a substantial amount of that volume supported re-processors in the Baltic states.
The production of dimensioned softwood from the three Baltic states, Latvia, Lithuania and Estonia is usually just below 6 million m3, of which around 4.5 million m3 is exported, with Latvia being the largest producer and exporting around 2.9 million m3.
Latvian production lies between 2.6 and 2.7 million m3 and around 850,000m3 is consumed by the domestic market. Its imports of sawn softwood normally amount to just over 1 million m3, which are generally processed further for re-export.
Latvia is now clearly the second most important supplier of imported softwood into the UK after Sweden with an estimated 1.3 million m3 but that figure includes products such as landscaping timber and rounded poles and posts as well as construction grades.
While initial price surges in the UK related to the most common imported construction grade of C24, higher qualities of unsorted and 4th/5th redwood got left behind. In July, a substantial rise is planned by shippers and importers to rectify the market and re-set the normal and historical price differential. Within this round of price increases there will also be a re-valuation of packaging specifications with 6th grade and schaal boards set to reach double the price against this time last year.
Price increases on the UK market for joinery grades could exceed an equivalent of €200/m3 according to several sources, while the levels for C24 are facing a further jump of €116/m3 during July.
After what has seemed a never-ending roller coaster ride of price increases and crashes for many years, there is a consensus that softwood might have at last reached a position where its value is reflective of the years of high investment, from forestry right through to the consumer, as it approaches a long overdue catch-up.
